Risk Parameter Recommendations
Summary
Should the community choose to list wstETH on Aave V3 Polygon, below are consolidated risk parameter recommendations. Please see further below for a breakdown of recommendations and considerations for transparency.
To summarize, the below consolidations were made:
- Using Gauntlet’s LB (higher value)
- Using Gauntlet’s supply cap (lower value)
- Using Gauntlet’s LB for e-mode (lower value). Depending on how usage evolves, the community may adjust after listing.
| Symbol | Isolation Mode | Borrowable | Collateral Enabled | LTV | LT | LB | RF | LPF | Debt Ceiling | Supply Cap | Borrow Cap |
|---|---|---|---|---|---|---|---|---|---|---|---|
| wstETH | NO | YES | YES | 70% | 79% | 7.2% | 15% | 0.10 | N/A | 1800 | 285 |
eMode - Yes, ETH Correlated Category (LT 93%, LTV 90%, LB 1%)
IR Curves
| Parameter | Recommendation |
|---|---|
| Base Variable Borrow Rate | 0.0025 |
| Variable Rate Slope 1 | 0.045 |
| Optimal Usage Ratio | 0.45 |
| Variable Rate Slope 2 | 0.8 |
| Reserve Factor | 0.15 |
Additional Detail
Gauntlet Analysis
Parameter Recommendations
| Symbol | Isolation Mode | Borrowable | Collateral Enabled | LTV | LT | LB | RF | LPF | Debt Ceiling | Supply Cap | Borrow Cap |
|---|---|---|---|---|---|---|---|---|---|---|---|
| wstETH | NO | YES | YES | 70% | 79% | 7.2% | 15% | 0.10 | N/A | 1800 | 285 |
Gauntlet has previously provided wstETH parameter recommendations for Aave v3 Ethereum, Aave v3 Optimism, and Aave v3 Arbitrum, which serve as the foundations for the following wstETH initial parameter recommendations on Aave v3 Polygon. We note that wstETH does not yet have a Chainlink price feed on Polygon and that our recommendations are conditional on a price feed existing.
As noted in our wstETH param recommendations for other chains, parameterizing new markets provides a specific challenge due to the lack of user data to train simulation models. That said, we anticipate wstETH to act similarly on Aave v3 Polygon as on as it does on other layer 2 chains, so we use those as a jumping-off point for these recommendations.
We recommend the following parameters for wstETH on Aave V3 Polygon:
Isolation Mode - No
Borrowable - Yes
Collateral Enabled - Yes
eMode - Yes, ETH Correlated Category (LT 93%, LTV 90%, LB 1%)
wstETH’s market risk in eMode on Aave v3 Polygon is relatively minimal given the conservative proposed borrow and supply caps and its correlation with other ETH-derived liquid staking derivatives, thus we recommend it be included in the ETH-correlated eMode category at the current eMode parameters. wstETH has sufficient liquidity on Polygon to facilitate any foreseeable liquidations at the recommended parameters. As of now, if the full supply cap of 1800 wstETH were swapped for ETH via 1inch, it would incur less than 1% slippage.
Supply and Borrow Caps
Supply Cap (in tokens) - 1800 / Borrow Cap (in tokens) - 285
Gauntlet recommends Supply Caps and Borrow Caps falling between our initial wstETH recommendations for Optimism and Arbitrum. We recommend a Supply Cap of 1800 and a Borrow Cap of 285. The liquidity of wstETH on Polygon is higher than that of Arbitrum and lower than that of Optimism, as the following table shows:
| Chain | wstETH swapped to ETH for 1% slippage |
|---|---|
| Ethereum Mainnet | 345,000 |
| Optimism | 3200 |
| Polygon | 1500 |
| Arbitrum | 1000 |
These relatively conservative caps will mitigate unknown tail risks while giving the market ample time to naturally evolve and grow. In the case that the wstETH market grows quickly due to its greater use cases as compared to stETH, we can meet rapidly increasing demand with proactive updates as needed.
LTV - 70.0% / LT - 79.0%
Gauntlet recommends the same LTV and LT on Polygon as on Optimism and Arbitrum, given the similar profiles of these markets.
Liquidation Bonus - 7.2%
Gauntlet recommends initializing the LB at 7.2%, the same value we recommended for v3 Optimism and Arbitrum.
Liquidation Protocol Fee - 10%
Gauntlet has recommended a 10% LPF for the LPF of wstETH on v3 Ethereum, Optimism, and Arbitrum. For v3 Polygon, we recommend the same. This, again, will allow for protocol revenue from LPF while minimizing effects on liquidator behavior and user experience. The LPF is a percentage of the LB that ultimately contributes to Aave reserves. LPFs, like LBs, are intimately linked to liquidation behavior, as they serve as the primary incentive for liquidators. As such, more data is needed going forward to conduct analyses on what optimal LPFs should be. A high LPF and unadjusted LB may deter liquidators from conducting liquidations due to fears of unprofitability. A high LPF with an upwards adjusted LB to ensure bonuses for liquidators similar to v2 may cause too much of the collateral to be eaten up by liquidations, which also impacts liquidator behavior.
Reserve Factor - 15%
Gauntlet recommends wstETH reserve factor to be that of the reserve factor for recommended wstETH on Ethereum, Optimism, and Arbitrum, which is 15%.
IR Curves
We recommend the same IR curves used for wstETH on Optimism and Arbitrum:
| Parameter | Recommendation |
|---|---|
| Base Variable Borrow Rate | 0.0025 |
| Variable Rate Slope 1 | 0.045 |
| Optimal Usage Ratio | 0.45 |
| Variable Rate Slope 2 | 0.8 |
| Reserve Factor | 0.15 |
Chaos Analysis
Liquidity Data:
the current price of wstETH through 1inch is 1.116 [ETH]:
1% slippage 2100 wstETH:
2800 - 5% slippage:
2900 - 8.25% slippage:
| Chain | wstETH swapped to ETH for 1% slippage |
|---|---|
| Ethereum Mainnet | 150,000 |
| Optimism | 2700 |
| Polygon | 2100 |
| Arbitrum | 800 |
We recommend the following initial parameters for wstETH on Aave v3 on Polygon:
Supply and Borrow Caps
Supply Cap - 5,600 wstETH:
According to the current on-chain liquidity and our interim methodology, we see that with the recommended LP, we have 2800 wstETH at a 5% slippage - and we multiply this by 2 = 5,600 wstETH
Borrow Cap - 285 wstETH:
according to our interim methodology, we recommend the borrow caps as supply_cap*U_Optimal = 5,600 * 0.45 = 2,520.
But due to exposure risk consideration and lack of user data, we recommend adopting the more conservative cap recommended by Gauntlet at 285.
Isolation Mode - No
Borrowable - Yes
Collateral Enabled - Yes
LTV - 70% / LT - 79%
Set similarily as on Arbitrum and Optimism
Liquidation Penalty - 5%
From the liquidity data we see that most of the liquidity on-chain is concentrated around the 5% range from the current price. by increasing the LP higher, we don’t get a major amount of liquidity.
eMode - Yes, ETH Correlated Category (LT 93%, LTV 90%, LB 2%)
For the parameters above, we recommend the same parameters we recommended and were set for wstETH on Arbitrum V3, as they are set conservatively, and we anticipate similar volatility of the asset.
Liquidation Protocol Fee - 10%
We recommend the LPF to be in line with our recommendation for wstETH, cbETH, and rETH on Ethereum V3. This is a default parameter configuration that should be revisited with more liquidator behavior data.
Reserve Factor - 15%
We recommend the RF to be in line with our recommendation for wstETH, cbETH, and rETH on Ethereum V3.
IR Curves
We recommend the same IR curves used for wstETH on Optimism and Arbitrum:
